CRA has announced that it is withdrawing its administrative position allowing participants in a joint venture (“JV”) to establish a fiscal period for the JV that differs from the fiscal periods of the JV participants. This change was made inevitable by the proposed changes announced in the 2011 Federal Budget to limit the tax deferral opportunities for a corporation with a significant interest in a partnership that has a fiscal period that is different from a corporate partner’s taxation year (the “corporate partnership anti-deferral rules”).
There is no definitive distinction between a JV and a partnership. Neither a JV nor a “partnership” is defined in the Act and the case law is of limited assistance in this regard. On its website, CRA describes a JV as “… an arrangement where two or more persons (participants) work together in a limited and defined business undertaking. Ordinarily all participants of the joint venture contribute assets, share risks and have mutual liability”. It should be observed that this definition could just as easily describe a partnership.
CRA, however, goes on to identify what, rightly or wrongly, has become the factor that is usually used to distinguish a JV from a partnership: “A joint venture agreement is not a continuing relationship between participants. For example the venture may be for one specific business project. Once the project is completed, the joint venture ceases to exist.”
GST/HST Policy Statement P-171R lists 12 criteria that can be used to attempt to distinguish a JV from a partnership. In practice, however, CRA has not frequently taken the position that a JV is, in fact, a partnership.
Contrary to a partnership, a JV does not have a separate fiscal period for taxation purposes. Accordingly, each participant in a JV should be required to include in income for a taxation year its income from the JV up to the end of its taxation year. If the various participants in a JV have different taxation year ends, the profits of the JV should be computed at each participant’s taxation year end.
Nevertheless, at the 1989 Canadian Tax Foundation Conference, Revenue Canada (as it was then called) announced that it would, on an administrative basis, allow a JV to establish a fiscal period different from the fiscal periods of the JV participants, where the participants have different fiscal periods and there is a valid business reason for a separate fiscal period. This administrative position allowed the income earned by a participant in a fiscal period of a JV to be included in the participant’s income for its taxation year in which the fiscal period of the JV ended.
Significant deferral of tax was possible based on CRA’s administrative policy. For example, a taxpayer with a December 31 taxation year end that was a participant in a JV with a January 31 fiscal year end could defer 11 months of JV income.
For its first taxation year ending after March 22, 2011, a participant in a JV that has relied on CRA’s administrative position will no longer be able to compute its income as if the JV had a separate fiscal period. Such a JV participant will be required to include in computing its income its share of income from the JV for the fiscal period of the JV ending in its taxation year (“non-stub period”), as well as its share of income from the JV venture for the period beginning on the first day after the end of the non-stub period and ending on the last day of the taxation year of the JV participant (“stub period”).
However, the CRA has announced that administratively it will allow the stub period income to be spread over five taxation years.
|Year-end||2011 Stub Period Income Inclusion||Deduction Allowed||Net Stub Period Income Inclusion|
|December 31, 2011||100%||100%||nil|
|December 31, 2012||100%||85%||15%|
|December 31, 2013||85%||65%||20%|
|December 31, 2014||65%||45%||20%|
|December 31, 2015||45%||25%||20%|
|December 31, 2016||25%||nil||25%|
In order to avail itself of this transitional relief, a JV participant is required to file an election in writing on or before its filing due date for its first taxation year ending after March 22, 2011. The election is filed by attaching a letter to the tax return or, in the event that the tax return has already been filed, by sending a letter to the appropriate tax centre. CRA has extended the filing due date for this election to September 22, 2012.
Transitional relief is not available to:
- a JV participant that fails to include all the stub period income in its first taxation year that ends after March 22, 2011;
- a JV participant that had not relied on the former administrative policy to calculate its income based on the fiscal period of the JV;
- income that would otherwise have been included in income for the taxation year of the JV participant; and
- income for which a deduction is available under section 112 or 113 of the Act.
Finally, a number of the technical corporate partnership anti-deferral rules will be applied in a similar manner to JV participants.
It is interesting to compare some aspects of the JV anti-deferral change in administrative policy to the corporate partnership anti-deferral rules.
- The proposed corporate partnership anti-deferral rules are contained in proposed sections 34.2 and 34.3 and section 249.1 while the JV anti-deferral changes are merely an administrative position.
- The proposed corporate partnership anti-deferral rules apply only to corporations that have a significant interest (10%) in a partnership. Partnerships involving individuals and professional corporations were the object of anti-deferral legislation back in 1995. The JV anti-deferral administrative policy applies to all participants in a JV. Whether or not a participant’s interest in a JV is “significant”, it will be affected by the new CRA administrative policy.
- Partnerships will continue to have a separate fiscal period from that of its partners. Partnerships will be permitted to elect to change their fiscal year end to align to the taxation year of one or more of the corporate partners. JVs will not be considered to have a separate fiscal period and each JV participant will have to compute its income from the JV based on its own taxation year end. This may be a significant hardship for some JV participants.
It remains to be seen how well the new administrative policy with respect to JV will work. Perhaps some JV participant may take the position that a JV was really a partnership all along if doing so would give rise to better tax results under the proposed corporate partnership anti-deferral rules.
A different approach might have been to define a partnership for tax purposes in a manner that included JVs. This would have allowed joint ventures to continue to have a separate fiscal period while eliminating undue deferral in the same manner as the proposed corporate partnership anti-deferral rules.